Perhaps the most debated topic of the new normal, the concept of real estate stocks to sell finally achieved mass-scale credibility. It all comes down to fundamental realities and it’s better to not overthink it. You can have high housing prices or high-interest rates but you can’t have both at the same time. That’s the bluntest explanation for why this once-hot sector now stinks.
May I be a bit controversial? I think retail investors and consumers at large need to grab their pitchforks and demand accountability from mainstream experts. A time-selected Google search will reveal that in 2021, many experts warned to not expect housing prices to fall. Now, the headlines read, home prices are finally dropping! It’s only been one year or so, and now, real estate stocks to sell suddenly became a blistering search query.
Well, outside of Jim Cramer making a heartfelt apology about a stock pick gone wrong, we shouldn’t expect housing experts to explain their feeding into the boom hype. Still, this remains a tough sector regardless, necessitating the below discussion about real estate stocks to sell.
|Z ZG||Zillow Group||$33.18|
|HMPT||Home Point Capital||$1.79|
Zillow (Z, ZG)
Zillow (NASDAQ:Z, NASDAQ:ZG) is a technology-based real-estate marketplace company. At the time of writing, the company features a market capitalization of $7.2 billion, which is rather startling. In February 2021, shares averaged nearly $200 a pop. Today, they trade hands for under $30. Z shares plunged 53.5% on a year-to-date basis.
Although the company incurred heavy losses, it’s very much possible that Z and ZG can fall even further. That’s because the fundamental narrative pivoted sharply. Throughout most of the new normal, the money stock expanded dramatically at unprecedented speed. Now, the Federal Reserve wants to unwind its balance sheet, effectively reversing the consequences of its bond buybacks.
What’s that going to do? Well, dramatically higher interest rates, which then translates to onerously high mortgages. In order for people to sell, they’ve got to reduce the price accordingly. Otherwise, maintaining the price at prior norms shrinks sellers’ total addressable market.
That’s why when I see “attractive” metrics like a price-to-sales ratio of only 0.68 times, I think value trap. There’s no way that Zillow can maintain its prior sales trend. So, it’s one of the real estate stocks to sell.
Redfin (NASDAQ:RDFN) is one of Zillow’s top competitors. Redfin’s business model includes charging home sellers below-average fees of 4% of the sales price of a property and providing commission rebates to purchasers of homes that use the service, per its public profile. Since the beginning of the year, RDFN lost a staggering 89% of its equity value.
Just on this stat alone, the idea of putting RDFN among a list of real estate stocks to sell seems risky. After roughly losing 90% of value, surely, shares must swing higher, right? Unfortunately, the market doesn’t think so. In the trailing month, Redfin shares dropped an alarming 26.5% in equity value. Just on the Nov. 2 session alone, it slipped almost 10%.
As with Zillow, Redfin features some attractive valuation metrics. For instance, its price-to-sales ratio is 0.2 times. And as with its rival, all I can think about is the value trap. Sure, point to Redfin’s three-year revenue growth rate of nearly 48%. With the Fed unwinding its bloated balance sheet, I don’t see how it’s possible that Redfin can maintain its growth trek. RDFN is easily one of the real estate stocks to sell.
Opendoor (NASDAQ:OPEN) is an online company that buys and sells residential real estate. Specifically, the company leverages the iBuyer business model, which uses advanced technologies to facilitate lightning-quick cash offers for homes. It’s a great concept but it suffers during down cycles. Since the start of the year, OPEN hemorrhaged nearly 85% of its equity value.
Frankly, I can write books about why you should consider OPEN as one of the real estate stocks to sell. For instance, just in the trailing month, shares slipped 27%, which is just awful. But the business model really does it for me (or doesn’t, should I say). In order to provide a quick cash offer, Opendoor necessarily must provide an offer lower than what a traditional broker can fetch.
Needless to say, that’s just not going to fly during a housing downcycle. Again, Opendoor features the same misleading problem as the other real estate stocks to sell. Metrics like price-to-sales ratios and revenue growth rates suggest that Opendoor is a great deal. It’s not. Dramatically accelerating mortgage rates kill housing sentiment, as everyone can clearly see.
Rocket Companies (RKT)
Rocket Companies (NYSE:RKT) arguably is most famous for Rocket Mortgage, which is the nation’s largest mortgage lender. Unfortunately, that makes RKT a target based on broader fundamental headwinds which we discussed earlier. Not surprisingly, since the beginning of the year, RKT dropped 55% of its equity value. That right there is a signal that RKT belongs among the real estate stocks to sell.
Frankly, the fundamentals indicate that the situation will probably only worsen from here on out. One of the glaring factors that something is awfully wrong is Rocket’s three-year revenue growth rate on a per-share basis. It slipped 46% below parity, warranting further investigation into its financials. Turns out, management ballooned the company’s shares outstanding, from 116.2 million in 2020 to nearly 2 billion in 2021.
Therefore, when you see certain other “favorable” valuation metrics, such as a low price-earnings ratio, be warned! RKT represents one of the real estate stocks to sell because it too is a value trap. There’s simply no way that the business can maintain its growth and earnings trajectory in a rising interest rate environment.
Home Point Capital (HMPT)
Home Point Capital (NASDAQ:HMPT) provides mortgage services for prospective homeowners. As with Rocket Companies above, Home Point finds itself plying its trade at the wrong place at the wrong time. To be clear to any Home Point fanatics, I don’t dislike the enterprise directly. Still, with a loss of over 64% of equity value on a YTD basis, HMPT represents one of the real estate stocks to sell.
Let’s not overthink this. With the Fed committed to controlling the inflation rate, interest rates will likely continue rising. They might not rise as quickly as anticipated but they’ll probably still rise. And that’s bad news for mortgage providers as it limits the available number of viable prospects. As a small piece of evidence, Home Point announced some layoffs in September.
As with the other real estate stocks to sell, the attractive valuation (and growth) numbers you see should have you repeating the motif of the day: value trap, value trap, value trap. Also, watch out for HMPT’s balance sheet. With a cash-to-debt ratio of only 0.05 times, sustainability becomes a serious concern.
Toll Brothers (TOL)
With the final two ideas on this list of real estate stocks to sell, we’ll be diving into controversy. Don’t worry, I’m not talking about an egregious kind of controversy. Instead, my opinion clashes with the fundamental assessment of the housing builders. Let’s start with Toll Brothers (NYSE:TOL), which develops both residential and commercial properties. TOL shares fell 40% YTD, an unsurprising loss.
What makes TOL problematic is that Gurufocus.com labels it a significantly undervalued investment. On paper, the company enjoys strong revenue and earnings into its July quarter. Therefore, it seems that Toll could move against the grain. However, I still maintain that this homebuilder too ranks among housing-related value traps.
For one thing, I would carefully monitor days inventory, which ticked higher on a year-over-year basis in the July quarter. Also, Toll boosted buyer incentives. Why would it do that if everything’s A-okay in the housing sector? Well, it’s not so don’t overthink it. What’s bad for brokerages and mortgage firms is surely bad for the homebuilders too.
Lennar (NYSE:LEN) represents one of the country’s biggest home construction firms. A phenomenal business during the housing boom, Lennar also struggles alongside other real estate stocks to sell. Since the start of the year, LEN gave up over 28% of its equity value. To be fair, in the trailing month, LEN moved up over 2%.
Nevertheless, I wouldn’t bank on that as a substantive sign that Lennar will rise against the tide of real estate headwinds. For one thing, investors should note that the company started trimming prices earlier this year. As well, it offered buyer incentives. Again, it begs the basic question: if housing is so strong, why provide incentives? You don’t see Rolex offering its timepieces for retail price.
Still, Gurufocus.com rates LEN as a significantly undervalued investment. As you might guess, I’m going to have to disagree. While its paper stats look great right now, they’re based on prior paradigms that simply won’t apply moving forward. Since circumstances can still get uglier from here, you might want to consider trimming exposure now.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.